1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended December 31, 1997.
Commission file number: 33-89384-LA
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 East Speedway Blvd., Tucson, Arizona 85719
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 320-1000.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock and Warrants to Purchase Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No. [ ]
Number of shares of common stock outstanding on December 31, 1997 was 4,398,725.
Transitional Small Business Disclosure Format:
Yes [ ] ; No [X].
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Prologic Management Systems, Inc.
Index
Page
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Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended December 31, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1997 and December 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7
Part II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote by Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 10-QSB 12
Exhibit 11 14
Exhibit 27
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
ASSETS (unaudited)
Cash $ 438,728 $ 815,120
Restricted cash 1,000,000 1,000,000
Trade accounts receivable less allowance
for doubtful accounts of $228,594 at
March 31, 1997 and at December 31, 1997 4,096,315 2,696,444
Notes receivable 38,889 58,333
Inventories 305,192 293,478
Prepaid expenses 176,501 91,030
----------- -----------
Total current assets 6,055,625 4,954,405
Property and equipment, net 521,150 545,113
Goodwill, net 1,333,786 1,514,162
Other assets 117,444 112,444
----------- -----------
TOTAL ASSETS $ 8,028,005 $ 7,126,124
=========== ===========
LIABILITIES AND EQUITY
Lines of credit $ 1,556,745 $ 1,102,448
Current installments of long term debt 39,816 63,074
Notes payable 459,007 394,570
Accounts payable 3,277,324 2,697,341
Accrued expenses 488,292 352,659
Deferred maintenance revenue 192,464 114,633
----------- -----------
Total current liabilities 6,013,648 4,724,725
Long term debt, excluding current portion 889,124 980,309
Shareholders' equity
Preferred stock, no par value. Authorized 1,000,000
shares; 41,667 shares issued and outstanding 250,000 --
Common stock, no par value, Authorized
10,000,000 shares; 3,675,395 issued at March 31,
1997 and 4,398,725 at December 31, 1997 8,613,537 8,038,955
Accumulated deficit (7,738,304) (6,617,865)
----------- -----------
Net shareholders' equity 1,125,233 1,421,090
TOTAL LIABILITIES AND EQUITY $ 8,028,005 $ 7,126,124
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Hardware $ 4,366,426 $ 4,441,796 $ 12,595,553 $ 7,329,495
Licenses 1,041,657 793,902 2,212,302 1,347,728
Services 938,778 727,022 2,122,822 1,519,411
----------- ----------- ------------ ------------
Total Net Revenue $ 6,346,861 $ 5,962,720 $ 16,930,677 $ 10,196,634
Cost of Sales 5,057,098 4,667,923 13,538,885 7,887,227
Gross Margin 1,289,763 1,294,797 3,391,792 2,309,407
Operating Expenses
Selling and Marketing 651,899 797,649 1,594,792 1,224,748
General & Administrative 745,336 713,270 2,292,371 1,937,658
Research & Development 113,141 230,943 309,973 412,456
----------- ----------- ------------ ------------
1,510,376 1,741,862 4,197,136 3,574,862
Operating Income (Loss) (220,613) (447,065) (805,344) (1,265,455)
Interest expense (113,058) (108,207) (301,348) (503,802)
Other income (expense) (21,800) (40,097) (16,006) 34,037
----------- ----------- ------------ ------------
Income (loss) before taxes (355,471) (595,369) (1,122,698) (1,735,220)
Income Taxes 0 0 0 0
----------- ----------- ------------ ------------
Net loss $ (355,471) $ (595,369) $ (1,122,698) $ (1,735,220)
=========== =========== ============ ============
Basic Earnings (loss) per share $ (0.10) $ (0.16) $ (0.30) $ (0.47)
Diluted Earnings (loss) per share $ (0.10) $ (0.16) $ (0.30) $ (0.47)
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(1,122,698) $(1,735,220)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 321,932 671,317
Changes in:
Trade accounts receivable (1,399,871) (3,418,661)
Accounts payable and accrued expenses 715,616 2,316,077
Other assets and liabilities (4,910) (1,750,926)
----------- -----------
Total adjustments (367,233) (2,182,193)
----------- -----------
Net cash used in operating activities (1,489,931) (3,917,413)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (115,333) (785,215)
----------- -----------
Net cash provided by (used in )
investing activities (115,333) (785,215)
Cash flows from financing activities:
Issuance of notes payable and debt 729,280 2,517,272
Repayment of debt (324,989) (1,046,807)
Issuance of Preferred Stock 250,000 --
Issuance of common stock 574,581 1,417,232
----------- -----------
Net cash provided by (used in)
financing activities 1,228,872 2,887,697
----------- -----------
Net cash increase in cash and cash equivalents (376,392) (1,814,931)
Cash and cash equivalents, beginning of period 815,120 3,426,981
----------- -----------
Cash and cash equivalents, end of period 438,728 1,612,050
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Periods
The accompanying condensed consolidated financial statements include
the accounts of Prologic Management Systems, Inc. (the "Company") and
its wholly-owned subsidiaries, Great River Systems, Inc. ("GRS"), and
BASIS, Inc. ("BASIS"). All significant inter-company balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principals, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying condensed consolidated financial statements include all
adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods presented.
Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1997 Report on Form 10-KSB. The
results of operations for the three months and the nine months ended
December 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
2. Earnings Per Share Calculation
Basic earnings per share is calculated based on the weighted average
number of common shares outstanding during the period. Diluted earnings
per share is calculated while giving effect to the diluted potential
common shares that were outstanding during the period. Because the
Company had an operating loss during the period, diluted earnings per
share is computed in the same manner as basic earnings per share.
2. Line of Credit
The Company has a $1,000,000 line of credit with its bank which was
subject to renewal in August 1997. Management and its bank have agreed
to extend the line of credit on a month to month basis under
substantially the same terms. The interest rate under the line of
credit is the bank's prime rate. The line of credit is secured by the
Company's $1,000,000 money market account. The credit agreement
contains, among other things, restrictive financial covenants. As of
December 31, 1997, borrowings under this agreement were $1,000,000 and
the Company was compliant with the covenants.
The Company also maintains a $2,200,000 line of credit for the
financing of accounts receivable and inventory with Deutsche Financial
Services ("DFS") for its BASIS subsidiary. This financing facility was
subject to renewal in August 1997. The Company and DFS have agreed to
extend the line of credit through February 1998 under substantially the
same terms. The interest rate is at the prime rate plus 1%. The credit
facility is collateralized by a $300,000 CD from the Company's bank. As
of December 31, 1997, borrowings under this agreement were $556,745.
During the extension period, the Company plans to establish a new line
of credit for the financing of accounts receivable at both BASIS and
GRS. The Company has not yet completed the financing for this line of
credit. The Company does not have a commitment letter at this time;
however the Company is negotiating this with several firms.
3. Goodwill
Goodwill arose from the acquisition of GRS and BASIS and represents the
excess of the purchase price over the estimated fair value of the net
assets of GRS and BASIS. Goodwill is being amortized on a straight-line
basis over the period of expected benefit of 7 years. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. Accumulated
amortization totaled $384,845 at December 31, 1997.
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4. Property and Equipment
Property and equipment as of September 1997 are comprised of the following:
December 31, March 31,
1997 1997
------------- -------------
Furniture and Fixtures $ 225,648 $ 215,344
Computer equipment and software $ 1,103,602 $ 999,774
------------- -------------
$ 1,329,250 $ 1,215,118
Less accumulated depreciation $ 808,100 $ 670,005
------------- -------------
Net property and equipment $ 521,150 $ 545,113
============= =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements as filed in the Company's annual report on
Form 10-KSB. Except for the historical information contained herein, the matters
discussed in this 10-QSB are forward-looking statements that involve a number of
risks and uncertainties. There are certain important factors and risks,
including the rapid change in hardware and software technology, market
conditions, the anticipation of growth of certain market segments and the
positioning of the Company's products and services in those segments,
seasonality in the buying cycles of certain of the Company's customers, the
timing of product announcements, the release of new or enhanced products, the
introduction of competitive products and services by existing or new competitors
and the significant risks associated with the acquisition of new products,
product rights, technologies, businesses, the management of growth, the
Company's ability to attract and retain highly skilled technical, managerial and
sales and marketing personnel, and the other risks detailed from time to time in
the Company's SEC reports, including reports on Form 10-KSB and Form 10-QSB,
that could cause results to differ materially from those anticipated by the
statements made herein. Therefore, historical results and percentage
relationships will not necessarily be indicative of the operating results of any
future period.
INTRODUCTION
The Company provides systems integration services, networking services and
applications software for the commercial market. The systems integration
services include consulting, maintenance, training and the installation of
hardware on which to implement the Company's as well as third party software
products. The Prologic proprietary applications software is licensed for use to
manufacturers and for use in the wholesale distribution industry. The Company's
services and products are not directed to the retail consumer market. The
financial information for the periods ended December 31, 1996 includes operating
activity from GRS, a wholly owned subsidiary which was acquired on September 30,
1995, and five months of the operating activity of BASIS, acquired in August
1996. The financial information for the periods ended December 31, 1997 includes
the operating activity of GRS and BASIS. For additional information on the
combined operating results of the Company and its subsidiaries, see the
Condensed Consolidated Financial Statements of the Company and Notes thereto.
The discussion should be read in conjunction with and is qualified in its
entirety by the Condensed Consolidated Financial Statements of the Company and
Notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales for the third quarter of fiscal 1998 increased by
$384,141 to $6,346,861 compared to the third quarter of the previous fiscal year
when sales were $5,962,720. The most significant growth came from the
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sale of third party software licenses and services, which increased by
approximately 31.2% and 29.1%, respectively. Sales of third party software
licenses increased 31.2% to $1,041,657 compared to $793,902 for the third
quarter of the previous fiscal year. The 29.1% increase in sales of services,
which were predominantly integration projects, amounted to $938,778, compared to
sales of the previous year's third quarter of $727,022. As we begin to see a
favorable change in the sales mix with an increase in software and license
sales, hardware sales, as a percentage of total net sales, decreased from the
third quarter of the previous fiscal year when they were 74.5% of total sales.
Sales of third party software licenses and services were 16.4% and 14.8%,
respectively, of total net sales during the quarter compared to 13.3% and 12.2%
during the previous year.
Cost of Sales. Cost of sales increased proportionate to the increase in net
sales. Total cost of sales for the third quarter of the current fiscal year was
$5,057,098, or 79.7% of net sales, compared to cost of sales for the same period
last year of $4,667,923 or 78.3% of net sales. Although the sales mix during the
quarter began to change to the more profitable sales of software and services,
competitive pressure on the sales of third party hardware reduced the margin on
hardware sales, having an impact on overall margin. The Company's strategy is to
continue to increase the sales of integration services through its subsidiaries
and to begin to increase sales of its proprietary software products though its
subsidiaries' distribution channels. As sales of services and software increase
in relation to the sale of hardware, the Company expects to see more favorable
changes in its gross profit.
Selling and Marketing. Selling and marketing expenses decreased to $651,899,
or 10.3% of net sales, for the three month period ended December 31, 1997
compared to $797,649, or 13.4% of net sales, for the same period of the previous
fiscal year. The higher rate of expense in the third quarter of the previous
fiscal year is attributable, in part, to a one-time expense incurred by the
Company as part of its marketing plan. The Company expects to continue to
increase sales and marketing expenditures as it implements its growth strategy,
and expects the rate of expense to sales dollars to increase somewhat over the
short term.
General and Administrative. General and administrative expenses were
$745,336, or 11.7% of net sales, for the third quarter of the current fiscal
year, compared to $713,270, or 12.0% of net sales, for the third quarter of the
previous fiscal year. The Company expects total general and administrative
expenses to decrease as a percentage of sales as the Company continues to
centralize many administrative functions into its Corporate office.
Research and Development. Total research and development expense decreased
to $113,141, or 1.8% of sales, in the quarter ended December 31, 1997, compared
to research and development expenses of $230,943, or 3.9% of sales, for the same
period last year. Research and development is primarily concerned with upgrading
current proprietary software modules and developing additional applications for
the existing product line.
Operating Loss. The operating loss for the period decreased to $220,613, or
3.5% of sales, from $447,065, or 7.5% of sales, for the same period last year.
The operating loss improvement was the result of increased sales, as well as the
decrease in the rate of operating expenses to sales, as reductions in operating
expenses continued to have an impact.
Interest, Other Income and Expense. Interest expense and other expense for
the quarter of $113,058, was mainly interest paid on the current lines of
credit, short term and long term borrowings. The Company incurred approximately
$21,800 of other expenses, associated with raising capital.
Income Taxes. The Company had no income tax expense for the third quarter of
fiscal 1998 and 1997. As of March 31, 1997, the Company had Federal net
operating loss carryforwards of approximately $6,400,000. The utilization of net
operating loss carryforwards will be limited as determined pursuant to
applicable provisions of the Internal Revenue Code and Treasury regulations
thereunder.
Net Loss. The net loss for the quarter ended December 31, 1997 decreased to
approximately $355,471 versus a loss for the same period of the prior fiscal
year of approximately $595,369. The decrease in net operating loss was the
result of the increased sales and reduced operating expenses during the quarter.
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NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales for the nine months ended December 31, 1997 increased
to approximately $16,930,677 versus the net sales for the same period one year
ago of approximately $10,196,634, an increase of approximately $6,734,043. The
increase occurred in all sales categories with the largest increase in third
party hardware, which increased by $5,266,058. With the increase in total
revenues, came a change in the sales mix, as sales of hardware increased as a
percent of total sales from 71.9% to 74.4%, and sales of software and services
decreased from 28.1% to 25.6% of total sales. BASIS, acquired in August 1996,
was only included for five months of the nine month period ended December 31,
1996, and included for the entire nine month period of this fiscal year.
Cost of Sales. Cost of sales increased from approximately $7,887,227, or
77.4% of sales, to approximately $13,538,885 or 80% of sales, due to the
increased total sales as well as the change in sales mix to higher costing third
party hardware sales. The change, as a percent of total sales, reflects the
lower margin that is earned on sales of third party hardware versus the margin
earned on sales of integration services and proprietary software. The Company's
strategy is to increase the sale of high margin integration services and
proprietary software products by creating distribution channels through
acquisitions of system integration firms. The Company expects to begin to see
increases in its services and software sales from its operating subsidiaries in
the fourth quarter.
Selling and Marketing. Selling and marketing expenses increased by
approximately $370,044 from the nine month period ended December 31, 1996.
Selling and marketing expenses were approximately $1,594,792 for the nine month
period just ended and were approximately $1,224,748 for the same period last
year. As a percentage of sales, selling and marketing expense decreased from
12.0% last year to 9.4% this year. The increase is due, in part, to the
inclusion of BASIS for the whole year, as well as increases in field sales
staff. The Company plans to continue to increase selling and marketing staff and
product promotion expenses as part of its growth strategy.
General and Administrative. General and administrative expenses increased
from approximately $1,937,658 during the nine month period last year to
approximately $2,292,371 for the nine months ended December 31, 1997. The
increased amount is due to the addition of BASIS and the amortization of
goodwill associated with the BASIS purchase. As a percentage of sales, general
and administrative expense decreased from 19.0% last year to 13.5% this year.
The Company believes that general and administrative expenses will continue to
decrease as a percentage of sales.
Research and Development. Research and development expense decreased to
approximately $309,973, or 1.8% of net sales for the nine months ended December
31, 1997 versus approximately $412,456, or 4.0% of net sales, for the same
period last year. The Company believes that development expenses will continue
to reflect approximately 2% of total net sales.
Operating Loss. The operating loss for the nine month period decreased
$460,111, from the operating loss of $1,265,455, or 12.4% of sales, for the
first nine months of the prior year. The operating loss improvement was the
result of the increased sales, as well as the decrease in the rate of operating
expenses to sales as reductions in operating expenses continued to have an
impact.
Interest, Other Income and Expenses. Interest expense and other expense for
the nine months ended December 31, 1997 decreased to $317,355 compared to
$469,765 interest expense and other income for the first nine months of the
prior year.
Income Taxes. The Company had no income tax expense for the first nine month
period of fiscal 1998 and 1997. As of March 31, 1997, the Company had Federal
net operating loss carryforwards of approximately $6,400,000. The utilization of
net operating loss carryforwards will be limited as determined pursuant to
applicable provisions of the Internal Revenue Code and Treasury regulations
thereunder.
Net Loss. The net loss for the nine months ended December 31, 1997 was
$1,122,698, or 6.6% of sales, a significant improvement from the loss of
approximately $1,735,220 which was 17.0% of sales, for the same period last
year.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. Cash and cash equivalents totaled $438,728
at December 31, 1997 compared to $815,120 at March 31, 1997. The decrease in
cash was the result of funds required for operations and was primarily used to
finance increased sales.
The Company has a $1,000,000 line of credit with its bank which was subject
to renewal in August 1997. Management and its bank have agreed to extend the
line of credit on a month to month basis under substantially the same terms. The
interest rate under the line of credit is the bank's prime rate. The line of
credit is secured by the Company's $1,000,000 money market account. The credit
agreement contains, among other things, restrictive financial covenants. As of
December 31, 1997, borrowings under this agreement were $1,000,000 and the
Company was compliant with the covenants.
The Company also maintains a $2,200,000 line of credit for the financing of
accounts receivable and inventory with Deutsche Financial Services ("DFS") for
its BASIS subsidiary. This financing facility was subject to renewal in August
1997. The Company and DFS have agreed to extend the line of credit through
February 1998 under substantially the same terms. The interest rate is at the
prime rate plus 1%. The credit facility is collateralized by a $300,000 CD from
the Company's bank. As of December 31, 1997 borrowings under this agreement were
$556,745. During the extension period the Company plans to establish a new line
of credit for the financing of accounts receivable at both BASIS and GRS. The
Company has not yet completed the financing for this line of credit. The Company
does not have a commitment letter at this time; however the Company is
negotiating this with several firms.
During the previous fiscal year, the Company borrowed approximately $100,000
of current debt due on June 1997 at a rate of 8%. During July 1997, the note
holder agreed to extend on a month to month basis. As a result of the extension,
the Company issues 10,000 restricted common shares per month to the note holder
for the term of the extension.
Additionally, in the previous fiscal year the Company borrowed $820,000 in a
private offering of 10% Subordinated Convertible Notes. The Notes are due on
December 31, 1999. Prior to September 30, 1997, with the exception of one
$100,000 note holder, the Company renegotiated the conversion terms with note
holders of the remaining $720,000. The revised terms assign a fixed conversion
price of $3.75 per share. In addition, the note holders have been granted a
total of 252,000 warrants to purchase shares of the Company's common stock at a
price of $2.00 per share. The warrants will expire on December 31, 2001. During
December 1997 one $100,000 note holder exchanged the debt for unregistered
common stock of the Company. The common stock was exchanged at a price of $.625
per share for a total of 160,000 shares. The Company may, at the Company's
option, repurchase the shares on or before April 15, 1998, at $.75 per share.
During the previous fiscal year the Company borrowed $240,000 in short term
notes collateralized by its computer equipment and office furnishings. These
notes were due on July 31, 1997. Interest on these notes is paid monthly at a
rate of 2%. In July 1997, the note holders agreed to extend the payment of the
notes until October 31, 1997. During the first half of the fiscal year, an
additional $125,000 was borrowed against this equipment. At September 30, 1997,
total borrowings on the short term equipment notes were $365,000. Of the
$365,000, holders of notes totaling $205,000 agreed to extend through December
31, 1997, and the remaining $160,000 exchanged their debt for unregistered
common stock of the Company. The common stock was exchanged at a price of $.625
per share for a total of 256,000 shares. The Company may, at the Company's
option, repurchase the shares on or before April 15, 1998, at $.75 per share.
During November and December 1997, three affiliates of the Company
purchased, through cash and the assumption of debt, 241,330 shares of
unregistered common stock of the Company at $1.00 per share, which was in excess
of the market price of the Company's common stock on the respective dates of
purchase.
During the quarter, the Company purchased approximately $115,333 in capital
equipment and software for use at BASIS and GRS.
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During the current fiscal year, the Company has taken steps to reduce its
corporate overhead and overall operating costs where possible. The Company
believes that these reductions will not significantly impact the overall
strategy of the Company and will create efficiencies that will facilitate
generating positive cash flows from operations.
During July 1997, the Company initiated a private placement offering of
$3,000,000 of 8% Cumulative Convertible Preferred Stock. These shares have
rights to convert to common stock and warrants to purchase additional shares of
common stock of the Company. The offering was made to non-U.S. persons as
defined in Regulation S of the Securities Act of 1933. Shares were offered in
minimum quantities of 16,667 shares ($100,000) and a maximum of 500,000 shares
($3,000,000) at a price of $6.00 per share. The offering period ends at the
earlier of the sale of all of the shares offered or on March 31, 1998.
Convertible shares may be converted by the buyer on the earlier of June 30, 1998
or on the first day that the common stock of the Company is traded publicly on a
European exchange after a secondary offering on such exchange has been effected.
The conversion rate per share of preferred stock is $6.00 divided by the
conversion price. In the event the secondary Offering has been completed prior
to June 30, 1998, the Conversion Price shall be set at the same price as the
common stock offered in the Secondary Offering. In the event a Secondary
Offering has not been completed by June 30, 1998, the Conversion Price shall be
the average trading price of the Company's common stock (NASDAQ: PRLO; BSE: PRC)
during the month of June 1998 with a minimum price of $2.00 per share. For each
share of common stock received through conversion the holder will receive one
warrant (which will expire December 31, 2000) to purchase one share of common
stock of the Company at an exercise price equivalent to the effective conversion
price. The net proceeds from this offering will be used for general working
capital, possible future acquisitions and product development. Through the end
of December 1997, the Company had received subscriptions for $250,000 of the
Preferred Stock. The Company announced in October 1997, the engagement of Europe
Finance et Industrie as the Company's exclusive placement agent in Europe.
Through the first nine months of the fiscal year, the Company has not
generated sufficient cash flows from operations to fund its current operations
and, at the same time, the additional overhead required to continue the
Company's growth strategy and has therefore had to supplement its cash outflow
of $1,605,264 with borrowings from its lines of credit, and other short term
borrowings. The Company has not been able to implement its plan of integrating
the sale of its software into the newly acquired subsidiaries and has not
generated the software sales it had anticipated and has therefore not generated
the higher margin sales that it had expected. Management believes that it must
rely on outside sources of funds and reductions in operating costs until
revenues from both hardware, services and software generate margins which will
offset cash outflows.
In the future, the Company will require additional equity and/or debt
financing to achieve its current as well as future plans for expansion. No
assurance can be given of the Company's ability to obtain such financing on
favorable terms, if at all. If the Company is unable to obtain additional
financing, its ability to meet current and future plans for expansion could be
materially adversely affected. In addition, if the Company cannot maintain net
equity of a minimum of $1,000,000 or net tangible assets of $2,000,000 (as
established by Nasdaq to be effective February 23, 1998), the Company's listing
on the NASDAQ stock exchange could be suspended until the equity and net
tangible asset requirements for relisting (which are higher than the foregoing
listing maintenance figures) are met. The Company, as part of its expansion
strategy, regularly reviews possible opportunities to acquire systems
integration companies and businesses which would expand the Company's geographic
market presence.
Year 2000 Issue. The Company's proprietary manufacturing product line is
Year 2000 compliant and will be released in July 1998. The Company's internal
development tools are Year 2000 compliant. The accounting portion of the
proprietary distribution product line will be Year 2000 compliant by August
1998. Internally, the Company uses its distribution software accounting package
and does not foresee any problems in converting to the Year 2000 compliant
version of its software. The Company does not foresee any problems in working
with third party companies or clients because of the Year 2000 issue.
Furthermore, the Company does not believe that clients utilizing its software
products will have any problems with their vendors because of the Year 2000
issue. Costs relating to the development of the Year 2000 issue have been
included in the research and development expenses over the past year; we expect
additional expenses associated with Year 2000 compliance to be less than
$50,000, incurred over the next 9 months, and will be included in research and
development expenses, as incurred.
11
12
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This form 10-QSB contains forward-looking statements that involve risks and
uncertainties, including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings,
including the Company's 1997 Form 10-KSB.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries are
a party to any legal proceedings, the outcome of which, in management's opinion,
would have a material adverse effect on the Company's operations or financial
position.
ITEM 2. CHANGES IN SECURITIES
Through the end of December 1997, the Company had received subscriptions for
$250,000 of the private placement offering of the 8% Cumulative Convertible
Preferred Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
A. Exhibits:
Exhibit Number Document Page
-------------- -------- ----
11 Schedule of Computation of Net Loss Per Share 13
27 Financial Data Schedule
B. Reports:
No reports on Form 8-K were filed during the quarter ended December 30, 1997.
12
13
In Accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLOGIC MANAGEMENT SYSTEMS, INC.
DATED: February 13, 1998 By: /s/ James M. Heim
----------------------------------------
James M. Heim
President and Chief Executive Officer
By: /s/ William E. Wallin
----------------------------------------
William E. Wallin
Vice President, Chief Financial Officer,
Treasurer (Principal Financial and
Accounting Officer)
13
14
Exhibit Index
Exhibit Number Document
-------------- --------
11 Schedule of Computation of Net Loss Per Share
27 Financial Data Schedule